Questor share tip: APR Energy shares are priced to fail

TEMPORARY power provider APR Energy is confident about the second half. but a sharp fall in first-half profits revealed in interim results yesterday demonstrates the unpredictability of earnings in this business.

Questor thinks investors are overpaying for the promise of growth and the current situation offers an excellent exit point.

Contracts are always lumpy in temporary power but, even by the industry’s standards, this was a big move. APR Energy reported revenue down 44pc to $87.2m (£56.3m) from the same period last year. Roughly a third of the generator fleet came off hire around December last year.

The most painful loss was the end of a highly profitable contract in Japan to provide emergency power after the tsunami. Once these contracts end the generators then take more than three to five months to be relocated to new locations, sometimes on the other side of the world, incurring costs and all the while not generating cash. This explains why the impact on profits is amplified. The group slumped to a $3m loss in the first half, from a pre-tax profit of $51.8m at the same stage last year.

APR remains confident that, with the assets now in place and a strong order book, it will hit full-year targets. The order book was up a quarter from the year end to 14,439 megawatts (MWs) at the end of June. That means that, with APR’s fleet size of 1,607 MW, the order book provides earnings visibility of about nine months.

Brokers have maintained full-year revenue targets of $328m and pre-tax profits of $71m but, to hit these targets, revenue needs more than triple on the first half and APR requires a considerable reversal in fortunes on profit.

The issue here is one of risk. Investors are currently paying 21 times forecast 2013 earnings. That looks expensive when compared with peer Aggreko that trades on 17 times 2013 forecast earnings. Aggreko may be facing a slowdown in growth, hence the recent sell-off but it has much more reliable earnings.

APR is an expert at delivering power in the most demanding of locations. The issue could be that something goes wrong in Libya or Uruguay where 41pc of the fleet is now located. Questor thinks the shares are currently priced to fail. One slip-up in the next four months and shares will tumble.

The shares have recovered during this year from lows of around 590p and they now stand a whisker below the price at which they listed almost two years ago. This looks like a good time to bow out and APR is downgraded to sell.